Thursday, December 8, 2016

Ordinal wealth and the bigger pie fallacy

Picking up on Joseph's recent post (which in turn picked up on Jared Bernstein's earlier post), specifically this part:

When the benefits of trade are broadly spread then everyone benefits.  But capturing all of the benefits and then using that political power to seize additional benefits is a great way to get very powerful but it runs the risk of undermining the political calculation.  After all, if trade is the way that the "rich get richer" and the "poor get even less" then it starts to look like a very bad deal.
Let's focus on the first sentence. This is a completely conventional assertion and it's entirely valid if you make certain standard (and always implicit) assumptions about what it means to benefit from a transaction. Unfortunately, the reasoning does not stand well when wee start tweaking that assumption.

A few years ago, we ran a post discussing different ways of viewing wealth. One of the approaches we covered was ordinal wealth, the idea that, in some situations, total wealth might be less important (or a less useful metric) than wealth-rank. In terms of social status, political power, and personal satisfaction, being the richest man in town with say $10 million in the bank might be preferable to having $15 million but not breaking the top five.

There is no obvious reason why absolute wealth should be a better central metric than ordinal wealth and other relative measures – you can almost certainly find cases where each is appropriate – but if we do allow for the possibility that relative measures might sometimes work better, all sorts of cherished economic truths start to look fairly shaky.

Maybe I'm missing something, but pretty much all the assurances we've heard about how enlightened self interest will keep us on the right track seem to assume that rational actors will seek to optimize absolute wealth. If the rich and powerful are more concerned with maximizing relative position, it's difficult to see where that enlightenment would come in.


  1. Are you familiar with the work of economist Robert Frank?

    1. I wasn't but the Wikipedia entry looks interesting.